Investors dissatisfied with fund of hedge funds

A global survey has revealed that despite growing interest in fund of hedge funds (FoHF), less than a quarter of the pension schemes that invest in them are satisfied with their investment returns.

The Mercer Investment Consulting survey was based on a sample of 181 pension funds globally, of which one-third invested in FoHF, with a further 19 per cent indicating they would begin using them within the next two years.

However, more than a third of the respondents said they were dissatisfied with the manager fees surrounding FoHF, while 60 per cent of those that did not currently invest in the asset class said they chose not to because of this reason.

Mercer global head of investment consulting policy Divyesh Hindocha said the lack of satisfaction expressed by investors was likely to be due to a mixture of high expectations and fund managers not explaining their strategies clearly enough.

“While FoHF are attracting a great deal of attention, many investors are unclear about what they wish to achieve by investing in them, and what the funds can realistically deliver,” he said.

“If investors’ objectives are unclear and their expectations are out of kilter with reality, there is scope for disappointment.”

The survey also found that only 58 per cent of the respondents understood their FoHF manager’s investment approach, although this varied from around a third in Europe and Japan to as much as 85 per cent in Australia and New Zealand, where these funds have been available for longer.

“The survey shows that FoHF managers can do far more to improve their client servicing skills,” Hindocha said.

“Investors want to look under the bonnet to gain a better understanding of a fund’s strategy and operations, but many investment managers are reluctant to disclose full details.

“Fund managers that are transparent about their strategies and processes are more likely to attract investors and be able to manage their clients’ expectations better.”